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EUROPEAN CENTRAL BANK president Mario Draghi announced a slew of new measures to combat deflationary pressures in the euro zone yesterday.
Among them was a plan to make up to €400 billion available for banks to call on when lending to SMEs.
Similar plans have been tried before, but this one promises more stringent oversight of where the funds go – and penalties for banks that don’t use them for lending to the non-financial sector.
Yesterday, Draghi said that one of the main measures of the success or otherwise of his plans would be if there is a big increase in funding to SMEs.
From yesterday’s announcements, it is clear that the ECB is desperate to see funds travel into the real economy, but will it work?
The verdict
According to KBC Bank chief economist Austin Hughes, the funding injection is welcome, but will not be enough to reverse the fortunes of cash-starved SMEs overnight.
“It won’t be the catalyst but it could be a contributory element.”
He said that in recent years, SMEs have been reluctant to take on extra debt, while banks that have been bruised by the economic crisis have been slow to lend to anything with too much of a risk profile attached.
The new funding package won’t completely counteract that, but it will play a part, he said.
“I think it will help, but anyone who expects a seismic change will be disappointed.”
Fundamentally, the eurozone economy is still weak and looming stress tests are still likely to stay the hand of any bank when it comes to lending to small business, he said.
Nonetheless, he said that the funding package is “a small step in the right direction.”
“It is complementary to other elements rather than something in isolation that will be the defining change in the economic outlook.”
“If the environment improves for other reasons, it will be very helpful.”
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In direct response to the headline, no. It won’t.
All my working life (20 yrs) the emphasis has always been on wage restraint to help control inflation. Now we have a situation where deflation is the threat and the policy aim is to create inflation.
The easiest, fastest and most efficient way to reverse the threat of inflation against deflation is through wage increases for workers.
Basically, they’re forcing people in debt to assume more debt amid austerity and an economic slump.
Brilliant plan.
Does the ECB interest rate cuts filter down to variable mortgage rate holders, I think not, due to the greed of our banking sector. So after my little rant, my answer is no
It does the exact opposite.
As the banks income goes down due to trackers, they recoup it by tickling the variable rate.
Had a look at fixing over 3-5 yrs lately?
It’d make yer sac shrivel!!
Fcuk the ECB!
Every time they pull down their rates I wind up giving AIB more money every month to compensate the stupid greedy b@$tards for having dished out tracker mortgages during the lunacy.
Knowing our lot they will guarantee the entire €400 Mil regardless of who borrows it across the EU.
*Bil
The previous trillion didn’t filter down.
What hope this?
Ireland looking for scraps once again , hopefully new MEPs will allow us to grow a pair
I imagine it has to be applied for. Are our banks willing or even capable of applying?
One problem is that their is no demand in Europe so a lot of businesses aren’t expanding.
All encompassing austerity has left no demand in an entire continent.
People will sing its praises while the Eurozone has 0.2% growth, a deflationary environment, mass unemployment in a lot of it. Where interest rates are negative in real terms yet most people will not borrow to invest or build etc. Confidence in destroyed in most of Europe.
All the people who told the austerity junkies to shove it, like America and Britain are growing strongly and in a lot better shape, while Europe is exactly the same as 7 years ago, maybe worse for lost chances.
We live an economic zone where risk is gone for banks and bond investors because the ECB will pay no matter what. Countries can now borrow with a real interest rate of zero.
Austerity has failed the Eurozone economy, is the damage now done long term though. Looks like that.
Austerity has failed but so did expansionism. I don’t have the answer but I do now that increasing debt in a low to zero inflationary environment is the road to disaster. Governments chase illusionary growth plus inflation purely and simply to float themselves out of debt. It’s the economics of the madhouse. Every developed and emerging economy is trying to create growth by selling to each other. Unfortunatley one country’s trade surplus is anothers deficit so the competitive devaluations begin.
What’s the bet the banks will try and pump it into property. Seems to be the only business they know.
They will here Reg. Banks will once again be begging people to take out unsustainable home loans, that with 35 page pull outs in national news papers telling people buy now or miss out. Ah sure it will never happen again!
Yes it will!
Under strict proviso that none advanced to acquire property.
Say 2% of fund or about €10bn made available to Irish banks for lending to SMEs in the form of small loans and overdrafts…
200,000 small firms borrowing €25,000 over 5 years, plus €25,000 in overdrafts to each, for essential working capital, would kickstart the economy in my view.
EG This would allow tradesmen re-tool for next wave of building work; vans, tools, materials, insurance, etc.
In addition to service providers to construction sector, SMEs in leisure, professional services, transport, tourism, environmental, green energy, niche food, etc, could all participate here.
Of course there is one other imperative: Government would have to underwrite all of these loans. Security and Personal Guarantees may not be available in every case, so to make this plan work it is in Government’s best interests to step in with this guarantee.
Some biz will fail but overall positives for the country – via employment, taxes, less social welfare outgoings, lower crime rates nationally due to more opportunities.
Banks also need encouragement to fast track the process. No endless paper chasing and faffing about by the bean counters at the banks making sure everything is perfect with the borrower.
A little lending to many, should be the mantra from the banks, and not ginormous sums for the few ie €50,000 to 200,000 firms and not €1bn to 10, like during the lunatic years.
#how to restore faith in the euro
Surely we have given enough money to the banks by now?!
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